March 03, 2009

Bernanke Says Major Banks Viable, but System Not Yet Stabilized

Federal Reserve Board Chairman Ben Bernanke stressed that major U.S. banks are all lending, active and viable, but he acknowledged that the banking system has yet to be stabilized.

At a Senate Budget Committee hearing March 3, Bernanke stated that with respect to banking, “clearly we have not stabilized that situation.” He reiterated that the Fed does not believe nationalization is “either warranted or necessary,” and noted that as the government takes larger stakes in financial institutions there will be very close supervisory oversight to ensure that banks are not taking excessive risk and are taking the necessary steps to restructure themselves.

Asked to comment on whether any U.S. banks resembled “zombie institutions,” a term used in the context of Japan’s banking crisis, Bernanke replied, “I don’t think that any major U.S. bank is currently a zombie institution.” Pressed on whether American International Group, Inc. (AIG) qualified as a “zombie institution,” Bernanke stated that the insurer was “in a very difficult place.”

Bernanke defended the government’s decision to offer additional aid to AIG, saying the step was taken “with great regret and trepidation…we felt there was no alternative.” Bernanke stressed that the government is not trying to make AIG profitable again for the benefit of shareholders, rather “every objective we have is to make the company viable enough so it can sell itself off, sell off its non-core businesses and repay the taxpayer as soon as possible.

Meanwhile, Bernanke told members that while Citigroup Inc. “is certainly under stress,” it meets the criteria for being well capitalized and has a plan for restructuring. “We’re going to work intensively with Citigroup to make sure that it’s stable going forward,” Bernanke said.

Bernanke also told the hearing that a failure by policymakers to address the challenges in the economy and financial markets in a timely way would likely be more costly over the long term. “We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment, and incomes for an extended period,” he said.